SIDC Module 12 Equity financing, dividend policy and valuation question: market risk premium

SIDC Module 12Equity financing, dividend policy and valuation

The risk-free rate is 3.5%, a share's beta is 1.2 and the market risk premium is 6%. The next dividend is RM0.30 and dividends grow at 4% a year. What is the share's value?

A RM4.48
B RM4.66
C RM5.45
D RM7.50

Show the answer and explanation

Answer: A. RM4.48

Required return by CAPM = 3.5% + 1.2 × 6% = 10.7%. Value = D1 ÷ (r − g) = 0.30 ÷ (0.107 − 0.040) = RM4.48. RM5.45 uses the market's expected return (3.5% + 6% = 9.5%) instead of the share's beta-adjusted rate. RM4.66 grows the RM0.30, already next year's dividend, by another 4%. RM7.50 divides by the growth rate alone. Source: SIDC Module 12 Study Outline (Jul-Dec 2026) Section 6 Topics 10-12 (Equity Financing, Dividend Policy, Valuation); A. Damodaran, Investment Valuation (as at October 2026).

Common mistake

Using the market return instead of the share's own CAPM required return.

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